Introduction
Businesses operate in a complex environment, which is characterised by different conditions, factors and participants such as governments, consumers and businesses. Most of the forces emanating from the external business environment are beyond the control of business managers.
Gal (2006) hypothesizes that “the business environment is dynamic, engaging and connecting myriad business concepts in a complex and multifaceted interplay of issues, causes and effects that can manifest in foreseeable, as well as unpredictable and unprecedented risks and outcomes” (p.1).
The business environment is comprised of six main forces, which influence business operations. They include the competitive, economic, political and regulatory, socio-cultural, technological and natural forces. Organisations do not have control over changes emanating from the external business environment.
Despite the prevailing conditions in the business environment, businesses have an obligation to ensure that their operations culminate in maximisation of the shareholders’ wealth. This can only be achieved if the firm’s operations are adjusted to fit to the prevailing market conditions.
Consequently, understanding the business environment and its impact on business operation is critical in organisation’s effort to attain the desired level of success. This report entails a comprehensive analysis of the business environment in order to gain insight on the most effective business strategies to adopt.
Analysis
Allocation of resources; economic systems
Gal (2006) defines an economic system as the organised manner in which a nation or state apportions its resources in the national community. Some of the main economic systems that a country can adopt include market economy, mixed economy and controlled economic systems.
Free market economies
In a free market economy, allocation of resources is determined by the market forces. Consequently, the consumers determine what should be produced while the producers determine how the production will occur. On the other hand, the consumers’ purchasing power determines the consumer who gets the product produced.
Controlled economies – In command economies, the government or agencies appointed by the government undertake the role of controlling the scarce resources. In this type of economic system, the process of allocating resources is undertaken through a central planning system. The government determines the rate of tax to be charged and how the public amenities such as hospitals and roads are built.
Mixed economies – This type of economy is characterised by both controlled and free market economic systems. In a mixed economic system, the market is characterised by distinct public and private sectors. Resources in the private sector, such as the grocery sector are controlled by the market forces while allocation of resources in the public sector, for example the defence sector is determined by the government.
Socialism – In this type of economic system refers to a system whereby the process of allocating resources is undertaken collectively. Thus, the production processes under this system are socially owned. However, the system is controlled through a political hierarchy. Individuals within the political system make decisions on behalf of the society.
Economic policies
Fiscal and monetary policies
Governments have the capability of controlling aggregate demand, which is a component of the market sector through two main types of economic policies. These policies include the monetary and fiscal policies. The two policies are mainly used in tandem with each other and can lead to economic expansion or contraction.
Fiscal policy refers to the different measures that are used by governments in an effort to stabilise their economy. Examples of fiscal policy measures include adjusting the level of government spending and the tax rate. On the other hand, monetary policy includes the measures that are used by government in an effort to influence economic activity.
Monetary policy involves manipulating the rate of interest and the level of money supply in an economy. Increasing the rate of interest affects businesses in a number of ways. First, increase in the rate of interest makes the cost of borrowing from financial institution prohibitive. Thus, businesses that depend on credit finance may not be able to achieve their operational or investment objectives.
Secondly, increasing the interest rate leads to increment in the cost of production, decline in the volume of sales and the cost of marketing. Consequently, businesses might not be able to achieve their profit maximisation objective (Parris 2013).
Adjustment of fiscal policy also affects business operations in a number of ways. For example, reducing the level of personal income tax increases the consumers’ purchasing power significantly. Consequently, consumers are able to purchase more using their disposable income. Subsequently, businesses are able to increase their level of profitability. Moreover, reducing import tax enhances the productivity of businesses that depend on imported raw materials. This enhances the likelihood of businesses attaining long term survival goal.
Currency policy
The effectiveness with which a particular economy attains the desired level of economic growth and development is influenced by the currency policy adopted. The main types of currency policies that governments can adopt include the fixed, managed the flexible currency policies.
Under the fixed exchange rate policy, the rate of exchange is set and controlled by the government through the Central Bank. With regard to flexible exchange regime, the rate of exchange is determined by market forces. On the other hand, the rate of exchange under the managed system is allowed to fluctuate to a certain level. However, the government usually intervenes on the extent of fluctuation.
The currency policy influences the effectiveness with which businesses engage in international business activities. For example, the flexible exchange rate regime exposes businesses involved in international trade to a high degree of market risk because of speculation.
Consequently, appreciation in the value of the pound or the euro may lead to a decline in the amount of foreign exchange received by businesses involved in international trade with firms in the European region. Moreover, depreciation in the value of the foreign currency may lead to a decline in the value of assets denominated in foreign currencies.
Competition policy
Businesses experience competition from both local and foreign sources, which puts them under constant pressure to improve their competitive advantage. Failure to enhance their competitiveness may lead to decline in their ability to survive in the long term because customers may decide to purchase from elsewhere.
Gal (2003) asserts that “competition is an essential element in the efficient working of markets” (p. 102). Competition benefits consumers by stimulating businesses to be innovative and efficient. Moreover, consumers are able to access a wide range of products and services.
Governments are charged with the responsibility of ensuring that markets are characterised by fair competition. Consequently, they have an obligation to intervene in the event of a problem with regard to the competitive process. The UK government has instituted comprehensive competition policies, which control different industries such as the supermarket industry. Some of these policies relate to monopoly, mergers and cartels.
Tesco operates as a public limited company and is ranked as the largest supermarkets in the UK and the 3rd largest in world. The firm was established in 1919 in England. Its headquarters are located at Cheshunt, England. Over the years, the firm has managed to attain an optimal market position as a result of adopting effective competitive strategies. The firm has established retail outlets in different parts of the world.
In order to enhance competition, it is important for governments to nurture fair competition. This can be achieved by eliminating monopolies. A monopoly refers to a market that is controlled by one firm. Finding such a market is very rare. Over the past few years, Tesco has been widely accused by the Competition Commission of UK of being ‘a manipulative monopoly’. The firm has established numerous outlets in different parts of the UK in an effort to achieve its profit maximisation objective.
Consequently, the firm has extensively reduced the likelihood of other firms dominating the market. Business leaders in the UK assert that the presence of large Tesco stores have led to closure of approximately 20 small shops in London’s city centre. Implementation of a competition policy limiting establishment of Tesco stores in other parts of the UK will adversely affect the firm’s ability to achieve its desired growth (Johnson 2013).
Economic systems and government policies of the UAE
The UAE government is committed towards enhancing economic growth and development. Consequently, the government has adopted a free market economic system. The economy is characterised by minimal restriction on different issues such as international trade, operations of firms in the private sector and capital movement. The free market economic system has enabled the UAE to attain remarkable resilience with regard to economic changes (UAE Interact 2013).
The UAE has adopted effective government policies such as monetary and fiscal policies. The UAE has nurtured a high level monetary stability by controlling inflation. Moreover, the government has adopted a flexible exchange rate regime in an effort to foster economic growth.
The UAE economy is also characterised by limited government control. The government has eliminated corporate tax, which necessitates business operations. The UAE government has instituted effective competitive policies. For example, 51% of all firms in the country must be owned by locals. The objective of this policy is to shield domestic firms from competition (UAE Interact 2013).
Market structures
Perfect competition
This type of market structure occurs where there are numerous firms in the market that deal with similar products. The main characteristics of a perfect competitive market include;
- No non-price competition.
- Firms are price takers.
- No barriers to entry.
Price and output in a perfect competitive market are determined by the intersection of the forces of demand and supply in the industry. In such a market, firms cannot influence the market price but can sell as much as they want.
Monopoly
This refers to a market structure whereby the market is dominated by one producer. In a monopoly market structure, the monopolist controls the volume of output and product prices. Consequently, the producer has the capability to increase product prices above the competitive level in order to maximise profitability. Moreover, the monopolist also has the discretion on the volume of output to produce (Johnson 2013).
Monopolistic competition
This refers to the competition that exists in a market that is characterised by a large number of sellers who deal in similar but differentiated products. In this type of market structure, every firm has the discretion to determine the most appropriate output decision in accordance with the prevailing market demand. On the contrary, price decisions are determined by market forces (Johnson 2013).
The behaviour of businesses
Market forces
The operations of businesses are affected by different market forces such as demand and supply, customer expectations, and competition.
Demand and supply
Demand refers to the willingness and the potential of a consumer to purchase certain quantities of products at a predetermined price. On the other hand, supply refers to the ability and willingness of organisations to produce specific quantities of products at all the relevant prices. The prevailing market forces influences the amount of product produced by an organisation and the price set. For example, a high market demand motivates organisations to increase the volume of their output.
Customer expectations
Business operations are also influenced by changes in customer expectations. For example, change in the level of customer expectation with regard to product and services requirement provides insight on the extent to which an organisation should undertake continuous product innovation and improvement.
Competition
Business operations are also influenced by the intensity of competition in their respective industries. In an industry characterised by intense competition such as the UK supermarket industry, it is imperative for the market players to assess the performance of their competitors. For example, the firm can evaluate the marketing strategies such as pricing. This will aid in formulating competitive pricing strategies such as low-cost strategies, which will culminate in attainment of a high competitive edge.
Business and the cultural environment
Business operations are affected by changes emanating from different business environments such as the cultural environment. In the course of its operation, McDonalds, which operates in the US food industry is committed towards ensuring that its customers attain a high level of satisfaction. The firm specialises in producing and marketing different fast food products. In the course of its operation, the firm adheres to high health and safety standards. However, the firm’s operation may be affected by change in different cultural aspects. Some of the cultural components relate to the consumers’ attitude, customs, education and religion.
Over the past few years, consumers have become health conscious with regard to food products. This trend has arisen from increment in the level of consumer knowledge with regard to food products. Fast foods have increasingly been associated with the increasing cases of obesity and other lifestyle diseases. Consequently, consumers are increasingly being inclined towards healthy food products. Such a change in consumer behaviour and attitude may adversely affect the effectiveness of the firm in maximising its profit. In an effort to deal with the change in consumer behaviour, McDonald announced its plan to adjust is its production process by integrating organic food products in 2013 (Godelnik 2013).
Market structures in the UAE aviation industry
The UAE aviation industry is characterised by a monopolistic competitive market structure. This is evidenced by the large number of airline companies that operate in the industry. However, the firms offer differentiated airline services in an effort to attain a competitive edge.
Over the years, the UAE government has nurtured an effective market environment by eliminating market restrictions. This has increased the attractiveness of the industry to local and international airline companies. Currently, the industry acts as a gateway to most countries in the Middle East. To promote the industry’s growth, the UAE government has allocated $50 billion, which will be used in undertaking airport expansion. This will lead to increment in the intensity of competition.
Significance of global factors in shaping business activities
Impact of international trade to UK businesses
Businesses are established with the objective of maximising their level of profitability. To achieve this, it is imperative for business leaders to institute effective competitive strategies. One of the strategies that business leaders in the UK are considering relates to internationalisation. This trend has been necessitated by the accession of the UK into the World Trade Organisation and the formation of the European Union.
Through these economic organisations, businesses in the UK have been able to maximise their profitability by expanding their business operation into the international market by adopting different strategies such as exportation. Consequently, most businesses are able to deal with the intense competition in the UK. Moreover, international trade between UK and other countries has increased the productivity of businesses in the UK. The UK businesses are able to access a wide range of factors of production such as raw materials and labour from other countries more cost effectively.
International trade also plays a critical role in UK’s effort to attain economic growth by increasing the country’s earnings. In 2013, exports of goods from the UK into other EU countries increased with 1.3 billion pounds. The exports account for 32% of the country’s total Gross Domestic Product (GDP) (The World Bank 2013).
Impact of global factors on business in the UK
Negative and positive impacts of global factors to UK business organisations
International trade presents businesses with a wide range of benefits and challenges. For example, international trade exposes businesses to situations emanating from the political, economic, social, technological, cultural and legal environments. First, international trade exposes businesses to complex economic environment. Businesses in international trade in the Euro Zone are exposed to fluctuations in the value of the Euro.
Such fluctuations may adversely affect the firm’s investments in the international market. Moreover, firms operating in the global market are faced by complex political and legal requirements. Examples of such factors include the requirement to partner with the local companies in order to conduct business in the foreign market. Such requirements may hinder the ability of business to control their operations in the foreign market.
Businesses operating in the international market are also exposed to unique social and cultural issues such as the societies’ norms, beliefs, and attitude. Failure to comply with the cultural norms may adversely affect the firm’s competitiveness.
Despite the above challenges, globalisation enables businesses to tap the market potential available in developing economies. For example, businesses engaged in international trade are able to attain operational efficiency by accessing factors of production such as labour and raw materials more cost effectively.
Moreover, international trade enables businesses to achieve profitability by marketing their products to emerging market, which are characterised by growing demand for goods and services. International trade enables businesses to gain new knowledge on how they can integrate new technologies in order to enhance their competitiveness.
Impact of European Union policies on UK businesses
- Freedom of labour movement – The European Union has adopted freedom of labour movement as one of its key principles. The freedom of movement is prescribed by Article 45 of the EU treaty. The policy provides EU citizens an opportunity to seek for jobs in other member states. This policy has significantly expanded the labour market from which companies in the UK can tap talent from.
- Working conditions; the EU has also formulated a comprehensive set of rules which outline the workers’ rights with regard to health and safety, labour law, protection against discrimination and provision of equal employment opportunities. This policy has led to development of an environment conducive for working within UK businesses.
Implication of the EU policies on Tesco
The EU policies have provided Tesco with an opportunity to develop a strong human capital base. The firm can easily outsource human capital from other EU member states. This will increase the competitiveness of the firms in dealing with issues that emerge.
In the course of its operation, Tesco has an obligation to ensure that its operations are aligned with the employment policies prescribed by the EU. For example, the firm has an obligation to ensure that it provides equal employment opportunities to all individuals without discrimination. This means that the firm should not discriminate employees on the basis of any demographic variable such as age, race, gender and sexual orientation.
The European Union and the Economic and Monetary Union
The EMU is an organisation that is that is concerned with streamlining monetary and economic matters in the EU. EMU’s objective is to enhance cooperation amongst EU countries leading to establishment of a common currency and the European Central Bank. The UK did not adopt the EMU policies. Its decision not to adopt the single currency was informed by realisation of the fact that adopting the single currency would adversely limit its ability to implement economic policies such as monetary policies. In a single currency system, the rate of interest is determined by the European Central Bank. Consequently, it is likely for the country to experience a financial crisis.
Reference List
Gal, M 2003, Competition policy for small market economies, Harvard University Press, Cambridge.
Godelnik, R 2013, Will McDonald’s new, healthier menu help it become a millennial-friendly food chain. Web.
Johnson, W 2013, How monopolistically competitive market firms make price and output decisions. Web.
Parris, S 2013, What happens if interest rates go up. Web.
The World Bank: Exports of goods and services as a percentage of GDP, 2013. Web.
UAE Interact: The economy, 2013. Web.